'Clunker Bounty An Economic Boost?

ByDavid R. FrancisDecember 6, 1991

HERE'S one suggestion for getting the United States economy moving faster: Pay a "clunker bounty" for old cars.The federal government would offer $700 to anyone turning in a running pre-1978 automobile in 1992. Such a program would stimulate sales of new cars, Roger Brinner, chief economist of DRI/McGraw-Hill, a Lexington, Mass., consulting firm, will tell the House Budget Committee at hearings next week. With the economy in distress, such an oddball idea might get a more sympathetic ear in Washington these days. The Commerce Department calculates that real domestic output was up at a weak annual rate of 1.7 percent in the third quarter. This number, released Wednesday, was revised sharply from an earlier estimate of a 2.5 percent rate. And many economists figure growth could be even softer in the current quarter. Proposals for cutting taxes were multiplying in Congress before its adjournment for Thanksgiving. And the Bush administration is formulating an economic stimulus plan of some sort. But the problem with any general tax-cut proposal is that it would likely be controversial, undergo dramatic alterations in Congress, and the process could take a half year or more. By then, the economy might not need any extra push. A legislative hassle, notes David Wyss, another DRI/McGraw-Hill economist, could compound the problem of deteriorating public confidence. Moreover, a general tax cut boosts national output by only about $1.60 for every $1 in lost revenue, DRI calculates. A clunker bounty, Mr. Wyss reckons, has the advantage of probably paying for itself. Though it could cost as much as $7 billion to buy all the 10 million pre-1978 cars still on the road, those turning in the old machines will often use the $700 to trade up to a better used car, or even a new car. New car sales could rise as much as, say, 2 million. With the average price of a new car running around $15,000 apiece, the sales and other taxes (direct or indirect) levied on the new cars and newer used cars s hould exceed the bounty cost, says Wyss. So the bounty might not add to the $350 billion federal deficit projected for fiscal 1992. Since 1978 was the first year when cars had by law to include emission controls, any reduction in pre-1978 cars also would be a relatively cheap way to clean up the environment, Wyss adds. Another idea for giving the economy a quick kick would be to remove the present penalty on early withdrawal of funds from an Individual Retirement Account if the money is used for purchase of a home. The most likely beneficiaries of this break would be those in their 50s or 60s who have managed to set aside a substantial sum in an IRA, notes Wyss. They might well use the money to buy a retirement home in advance of actual retirement. This would benefit particularly retirement communities. But it would al so boost sales overall. As one of its last measures, Congress passed a highway bill to boost public works spending. But even with the rapid award of contracts, actual construction will have to await warmer weather in much of the country, Wyss notes. That means spring. With the poor economic news this week, many economists are expecting the Federal Reserve System to lower interest rates again soon. That could be encouraged if the employment numbers to be released this morning show, as widely expected by economists, another increase in the number of jobless. Wyss talks of the unemployment rate moving back up to 7 percent by spring. "The Fed ought to be concerned about putting a little more juice into the economy," says Patrick Corcoran, an economist with the Prudential Insurance Company of America. "The picture of sagging momentum in the economy is pretty pervasive." He has revised downward his forecast for national output in the current quarter from a real 1.5 percent annual growth rate to a 0.5 percent rate. And he's expecting growth in the first quarter to run at a modest 2.5 percent annual rate, picking up to a 4 percent rate in the spring quarter. In the next two weeks, a series of statistical revisions of past national output beyond those announced Wednesday are due to be published. By the end of that time, economic history may have been rewritten a bit. The time needed to analyze these new numbers, jokes Gregory Gieber, an economist with Smith Barney, Harris Upham &amp; Co., "will hold down my Christmas spending."